Some Specific Steps to Prepare Your Collection Agency for Sale

Yesterday, an owner of a mid size collection agency asked me to describe the market for a business like his.  I thought for a few seconds and responded that merger and acquisition activity is improving overall.

Over the past 18 months, amidst the most pervasive recession our industry has ever experienced, most M&A transactions that had a chance to close involved larger collection agencies buying smaller ones on a heavily structured basis.  Please don’t misunderstand this statement.  Transactions were also closing with financial buyers and corporate buyers from outside the collection business, and some at competitive prices, but they were the exceptional deal and not the norm.

Since June, we have been witnessed a noticeable ramp up in M&A activity and more competitive deal structures for performing companies.  I have always said there is a market for most businesses regardless of performance.  During the boom 10 year run between 1998 and 2008, when recovery performance was strong and financing was readily available, even underperforming companies were attracting considerable buyer interest and relatively competitive prices.  The spoils were there for everyone seeking a sale.  Sorry, but that is no longer the case.  If you’re thinking about selling your business now or at some point in the future, know that it will take significant time and energy.  If you don’t prepare, the sales process will most likely turn your business completely upside down, potentially exposing nuances of your business that you’re not even aware of that could jeopardize a successful transaction.

Before you subject yourself and your stakeholders to a sale, you should do everything possible to make sure you business is ready for “Prime Time”.  Prime Time means that you have prepared all of the information that you will need to present to a buyer, that all materials were objectively reviewed for accuracy and completeness, and that you have arranged your information in a format that is accessible and understandable to the buyer, their due diligence team, and their lenders.

To get you thinking about the information you will need to assemble, I compiled this list of 7 subject areas that all buyers will thoroughly review before buying any company. Of course, this is not intended to be an inclusive list.  Your list might vary based upon particulars associated with your specific industry or individual business.

I.     Corporate Records, including any and all corporate governing documents, organizational documents, operating agreements, stock-related information, buy-sell agreements, and employment agreements that exist.

II.    Financial Information – Before a sale is consummated, a buyer will require access to all of your financial records, including:

• • Yearly financial statements with notes for at least the past three (3) fiscal years and all statements or reports tracking the performance of any division, business line, separate office, call center, or operating unit.
  • Financial and operating plans for the current year and for the next three (3) years, including budgets and forecasts with assumptions.
  • Details of any off-balance sheet commitments such as joint venture relationships, sharing arrangements, or other commitments that might impact your company’s financial performance.
  • Description of all outstanding debt, obligations, and promissory notes including contingent obligations.
  • Information regarding bank and trust company relationships.
  • Copies of federal and state tax returns for the last three (3) years, IRS determination letters and the most recent tax audit conducted of your business.
  • Details of any Insurance, bond, and license related agreements.

III.    Client information, including a list of your largest clients by name, line of business services provided, total gross and net revenue generated broken down by division, product, service program, and market.  The buyer will also ask to review a summary of new customers, as well as lost customers for the past three fiscal years.

IV.    Litigation and Claims.  Be prepared to cover all litigation, governmental investigations or inquiries, arbitration proceedings, or claims however frivolous or outdated you perceive them to be.

V.     Human resources, including current and historical organizational information pertaining to your firm’s owners, executives, directors, managers, officers and staff.  Check to see what’s posted on their social media accounts (e.g., Facebook and LinkedIn pages), because the buyer will.  Assemble all employment agreements, consulting agreements, compensation schedules, non-solicitation agreements, noncompetition agreements and confidentiality agreements, including any agreements entered into with any employees, agents, representatives, account executives, and account managers regardless of the reason.  Copies of all severance agreements and settlement agreements entered into with any current or former director, manager, officer, employee, etc.

VI.    Intellectual property and information technology, including all information and all agreements relating to any technology usage or trade secrets, process agreements, equipment leases, agreements with clients, marketing agreements, consulting agreements, distributor agreements, supplier agreements, service agreements, agreements with subcontractors or service providers and other agreements.

VII.    Properties, fixed assets, and any environmental matters including a detailed schedule of all your company’s (facility) lease obligations. You will also need to provide a fixed asset registry to account for the fixed assets that exist within the facility(ies) – computers, furniture, etc.

Preparing all of this information is only the beginning.  Making sure that it is in a format that is accessible and understandable to the buyer is essential.  A considerable amount of heavy lifting is required to get ready for a sale and these tasks should not be taken lightly.  But that groundwork is itself an investment in your business—one that I assure you will simplify the sale process and improve your returns at closing.

Mike Ginsberg is the leading M&A expert for the accounts receivable management industry. He leads a premier advisory team at Kaulkin Ginsberg that helps ARM industry owners and executives succeed in their growth, exit, and M&A strategies. Check out his page on insideARM.com.